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Book Review: “The Essays of Warren Buffett”

Berkshire Hathaway Chairman Warren Buffett is often referred to as the “Sage of Omaha” and is respected for his business insight. But in many ways his reputation for sagacity is simply a by-product of a very basic, company-related project. What Buffett set out to do was to cultivate a certain type of shareholder for Berkshire – one that that understands and appreciates his long-run approach to investing. In the 1988 shareholders’ letter, Buffett makes this explicit when he says that “all of our policies and our communications are designed to attract the business-oriented long-term owner and to filter out possible buyers whose focus is short-term and market-oriented.”

Buffett’s annual letters to Berkshire shareholders serve first and foremost to explain what he is doing, so that the shareholders understand what they are in for. The letters assume that the shareholders are long-term owners, and so much of the letters’ content presumes familiarity with prior letters. In other words, each additional letter is a part of a continuing conversation (or, perhaps, monologue) and each letter can be best appreciated within that larger context.

All of Buffett’s shareholder letters for the years 1977 through 2012 are available on the Berkshire website, and anyone interested in developing a better understanding of Buffett’s approach and investing philosophy — and in seeing how Buffett has addressed his key themes over time — can freely access the letters.

However, most readers would find the prospect of reading 36 years’ worth of shareholder letters to be a forbidding prospect. For starters, the letters are arranged chronologically, not thematically, so even a very determined reader might find it challenging to work through the archive and emerge with a systematic understanding of how Buffett has developed his key themes over time. It can also be daunting to try to find among the various letters the place where Buffett has, for example, mentioned mutual fund directors, or described derivatives as “weapons of financial mass destruction.”

Fortunately for anyone interested in better understand Buffett’s philosophy or in trying to find what he has said on a particular topic, there is a brilliant alternative to simply working through all of the letters. George Washington University Law Professor Lawrence Cunningham has collected and edited Buffett’s letters and other writings into a highly readable and topically indexed volume entitled “The Essays of Warren Buffett: Lessons in Corporate America,” the third edition of which was released earlier this year. Cunningham has done a masterful job distilling Buffett’s writings and organizing them by topic

The latest edition is updated to include excerpts from Buffett’s most recent letters. The book not only facilitates quick location of Buffett’s statements on specific topics, but it also affords an opportunity to see how Buffett has developed his themes over time, which unquestionably provides great insight into Buffett’s investment views.

Because Buffett wants to the Berkshire shareholders to understand the company’s business, one of the principal focuses of Buffett’s annual letters is the topic of how to understand and use financial information. What makes Buffett’s letters so interesting and rewarding to read is how clearly he can explain even relatively complex financial concepts. Buffett also frequently writes with humor – for example, in explaining the need to allow a particular project to unfold , he notes that “No matter how great the talent or effort, some things just take time; you can’t produce a baby in one month by getting nine women pregnant.”

Sometimes in the course of his annual letters, it seems as if Buffett has a penchant for going off on tangents. However, reading Buffett’s essays arranged thematically reveals the way that some of these seemingly tangential asides fit into larger themes. For example, Buffett’s fulminations about stock options fit within the larger context of executive compensation, which in turn is a topic that relates the more basic concern of what makes a firm a well-managed company. Understanding what Buffett thinks makes a company well-managed in turn helps explain Berkshire’s investments – which is the ultimate purpose of his letters.

The letters obviously have far greater value than simply helping Berkshire investors to understand the company. Indeed, Buffett’s dissertations on investing are full of remarkably good and practical advice. (Indeed, even though I am a long-standing Buffett devotee, and, I should add, a Berkshire shareholder as well, I found it worthwhile to re-read the excerpts about investing collected in this book.) For example, Buffett notes that there are three primary causes for investors to experience poor investment results: high costs, portfolio decisions made based on tips and fads rather than basic principles; and a start-and stop approach to the market marked by untimely exits and entries. Buffett concludes by noting that “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

While Cunningham’s book provides a thorough overview of Buffett’s writings, there are omissions. As I also noted in my review of the prior edition of this book, I think the volume would be even more complete were it to include selections from Buffett’s writing over the years about insurance. The insurance business has been the segment on which Buffett has concentrated the most, and his reasons for his focus on this industry convey a lot about his approach to investing and his understanding of how business cycles work. In particular, Buffett’s many comments about “float” and the insurance “cycle” convey a lot about what his overall approach to investing and business.

Another gripe I have is, as I also noted in connection with the prior edition, though this volume omits Buffett’s writings generally about insurance, somehow the book manages to include every single instance where Buffett has said that his company does not carry D&O insurance. I have always thought that these statements are dangerous for mere ordinary mortals. It is fine for Buffett and his billionaire board members to disdain D&O insurance (particularly given that the corporate indemnity that Berkshire provides is more financially sound than any insurance commitment would be), but persons of more ordinary means can ill afford to run the risk of uninsured board service.

But these quibbles are minor. The book itself is quite an accomplishment; it is that rare business book that is both worthwhile and enjoyable to read.

Special thanks to Professor Cunningham for calling my attention to the book.

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